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Wednesday, 3 October 2012

New flat prices: Getting it right

For one, people have been alarmed at the dramatic rise in the cost of public housing in recent years. Since HDB resale prices hit the trough in 3Q 2005, the resale price index has risen by 95.5% over the past seven years.

While statistics are not available on new flat prices, it is safe to say new flat prices have also risen significantly - if not by the same quantum - as they were closely pegged to resale flat prices until about a year and a half ago.

Rapid and sharp increases in prices are not just obstacles to new households but to all potential upgraders and future households.

Hence, we can understand the deep concerns held by many over the high prices for public housing flats.

More recently, the sector has drawn a lot of publicity from the sale of the first public housing flat for a million dollars.

If you have been monitoring the HDB resale market, you will know that for several months now, the market has been continually testing this benchmark but has not been able to breach this one million dollar mark until recently.

As rightly pointed by some, these high prices are the exceptions for “special” flats rather than the norm.

The high prices for a few flats are not a worry in themselves but it is a legitimate concern if they are an accurate reflection of what is happening to the market as a whole i.e. resale prices are on the climb again. That will be worrying.

The flash estimates released on Monday this week confirm the fears of most people. The HDB resale price index for the third quarter of 2012 rose by 2.0 per cent - higher than the 1.3 per cent rise recorded for the previous quarter - meaning prices not only rose but at a faster pace as well.

In this sort of environment, it is no surprise then that many are asking the Prime Minister whether it was possible to treat an HDB flat as a home, rather than as an asset.

Mr Lee responded by saying that Singapore's current system was but one type of model of public housing.

For Singapore’s case, Mr Lee said the government will build enough flats because we have the land for it and we can price it “right” so that it will remain affordable.

But what is the correct approach to price new flats?

For the past decade, the HDB has pegged it to market prices namely adjusting new flat prices from resale prices and taking into account locations and differences in flat quality.

This has led to unhappy results as prices have risen faster than household incomes in recent years.

Most Western governments consider public housing as a predominantly - if not wholly public good - and have thus approached it from the intended target market’s perspectives be it in terms of rentals or prices.

Most have chosen to house their poor and under privileged in rental flats as most target households have very high unemployment rates and are barely able to feed themselves without welfare handouts. It is only in Singapore that we have been able to eradicate poverty and get our less well-off section of our population to own their own flats.

Given the differences in approach, are our public housing flats predominantly public goods or are they both investment assets and public good?

PM Lee seems to believe that a flat should be both a public good and an investment asset. He preferred giving younger households a housing asset as an "endowment" which not only preserves whatever savings they have put into it but can also grow and possibly also give them the future lift in life.

The problem with treating flats as endowments is that you tend to have policies which have an upward biased on housing flat prices. As we know, property moves in cycles and in a globalised and open economy such as Singapore’s, the peaks and troughs can be very pronounced.

The government will be caught in a dilemma on how to handle these deep troughs. If measures are regularly introduced to stimulate flat prices, the market quickly catches on and the public housing market is soon caught in a vicious upward spiral.

Some goods are considered public goods because they convey intangible benefits to society as a whole which are not easily quantifiable. Because of that they cannot be left to market forces because the market will simply not provide or provide in sufficient numbers.

Besides providing for a basic need for shelter - which the United Nations considers a basic human right, the case for treating public housing as more of a public good rather than a private good has been articulated in Singapore before.

It gives every citizen household a stake in the country, a strong reason to stay and fight for the country and not flee at the slightest hint of trouble. It also leads to greater income equality by closing the gap between the haves and have-nots and promotes social harmony.

If we treat public housing as a predominantly public good then the correct approach would be to look at the income profile of the intended market and price the new flats accordingly after taking into account a reasonable loan period and a sustainable rate of interest.

When household incomes rise, so would new flat prices and vice versa. It is also a fairer system, treating every generation of Singaporeans the same way, past present and future. Nobody will be penalised for having born earlier or later.

I believe there is no need to worry unduly about the endowment aspect of public housing when there is economic growth and social progress in the country. It will come naturally.

Mr Colin Tan is the head of Research & Consultancy at Chesterton Suntec International.

[Not sure if I understand the suggestion, but If someone were to say to me, come up with a flat pricing mechanism that accounts for income or is pegged to income, this is how I would go about it.

First flats will be categorised as 3-rooms or smaller, 4 rooms, and 5 rooms.

Income ceiling for 3-rooms or smaller is say $5000 per month household income. 4-rooms would be $8000, and 5 rooms and larger would be $10,000

Assuming 30% of income is use for housing, the 3-room flat should not be more than $X. If you bust the ceiling, you pay a premium.]

Why we resist the ideologues

There are... liberal democracies where you can have an "Amos Yee" type freedom.

There are also very sad places where there is little freedom or security, and life is very hard.

And there are a few places where there is quite a lot of chaos and life is uncertain.

Then there are very few places where you can be reasonably civilised and have sufficient security and responsible freedom to have a good life.

Singapore is one such Oasis of sensibleness... we are an Oasis of order, competence, efficiency, and reasonableness in an otherwise chaotic unreasonable, incompetent WORLD. Not just the region.

If Singapore becomes a copy of a Western Liberal Democracy with all the inherent inefficiencies, silliness, drama, and chaos, it would be a very sad thing...

If Singapore breaks down and devolves into a corrupt, ineffective, unfocused, shambling chaotic third world country, it would also be a very sad thing.

There is only one place where you can find Singapore's straightforwardness, integrity, efficiency, competence, order... And that is here, in Singapore.

If we lose this, whether because we lean to much to the left, or whether we let ourselves sink into mediocrity through complacency or a sense of destiny, or divine right, it will be gone.

...so that is why we resist the ideologues.

Trees

“A society grows great when old men plant trees whose shade they know they will never sit in.”

Reminder

“There is nothing noble in being superior to your fellow man; true nobility is being superior to your former self.” - Ernest Hemingway

The Tao of Government

"Therefore the sage, in the exercise of his government, empties their minds, fills their bellies, weakens their wills, and strengthen their bones."

"He constantly (tries to) keep them without knowledge, and without desire, and where there are those who have knowledge, to keep them from presuming to act (on it). When there is this abstinence from action, good order is universal."